In Re Nuvelo, Inc. Securities Litigation 07-CV-04056-Order

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1 2 3 4 5 6 7 8 9 10 11 t 40. IN THE UNITED STATES DISTRICT COURT 12 U U FOR THE NORTHERN DISTRICT OF CALIFORNIA 4-oo .^ +^ 13 14 A Q IN re NUVELO, INC, SECURITIES Master File No 15 LITIGATION / C 07-4056 VRW 0 16 p 17 Class Action This Document Relates to: W-1 18 All Actions / ORDER 19 H 0. 20 Plaintiffs filed an amended consolidated complaint o ^ 4-4 21 (“Prior Complaint”) alleging violations of federal securities laws o 22 on November 9, 2007. Doc #31. On December 4, 2008, the court AQ 23 granted defendants’ motion to dismiss the Prior Complaint (“Prior

24 Order”). Doc #69. The Prior Order granted plaintiffs leave to b Z 25 amend. Doc #69 at 34-35. Plaintiffs did so on January 23, 2009, o a^ filing a second consolidated amended complaint (“SAC”). Doc #76. 0 26 W-1 27 On March 24, 2009, defendants moved to dismiss the SAC. Doc #78. 28 This order addresses that motion.

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1 I 2 As an initial matter, defendants request judicial notice 3 of 42 documents contained in Jeffrey Kaban’s declaration (Doc #80, 4 Exhs A–9[) relating to defendants’ motion to dismiss. Doc #79. 5 Federal Rule of Evidence 201 allows courts to take judicial notice 6 of matters that are “capable of accurate and ready determination by 7 resort to sources whose accuracy cannot reasonably be questioned.” 8 Fed R Evid 201 (b) . 9 Plaintiffs do not oppose the court taking judicial notice

10 of exhibits A-GG and LL-9[. Doc #91 at 2. Because the request for 11 judicial notice is unopposed as to those documents, and they are t 4o 12 either referenced in the SAC or demonstrate information available C U 13 to the market during the class period, the court takes judicial .0 .4 notice of exhibits A-GG and LL-9[. Doc #80. Doc #91 at 2-4. 14 ^A 15 Plaintiffs do, however, oppose defendants’ request for 16 judicial notice of exhibits HH-KK. Doc #91 at 2. Exhibits HH-KK 4 0 p17 include a Pharmaceutical Statistics journal article (Exh HH), two w 18 Food and Drug Administration (“FDA”) publications (Exhs II, KK) and 19 an FDA PowerPoint presentation (Exh JJ). All four documents relate 20 to a factual dispute relevant to defendants’ motion to dismiss:

21 FDA guidance on the statistical standard required to pass placebo- 22 controlled studies. Plaintiffs argue that “the purported ‘facts’ 23 that Defendants seek to prove by these documents may not be 24 judicially noticed because they are subject to dispute.” Doc #91

25 at 2. 26 While the court recognizes that the facts described in 27 the four disputed documents are not the proper subject of judicial 28 notice, defendants merely seek judicial notice of the fact that

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1 these documents were publicly available during the time the fraud 2 alleged in this action occurred. Doc #94 at 2. Courts hearing 3 securities fraud cases routinely take judicial notice of documents 4 with unquestioned authenticity that demonstrate the information 5 available to the market during the class period. See Construction 6 Laborers Pension Trust of Greater St Louis v Neurocrine 7 Biosciences, Inc, 2008 US Dist LEXIS 38899, *5 (S D Cal May 12, 8 2008) (taking judicial notice of FDA guidelines because they were

9 “publicly available to a reasonable investor”). These documents

10 may be considered “to establish ‘whether and when certain 11 information was provided to the market’ not the truth of the 40. 12 matters asserted in the reports.” In re Infonet Servs Corp O U 13 Securities Litigation, 310 F Supp 2d 1106, 1116 (C D Cal 2003), .0 14 quoting In re PetSmart, Inc Securities Litigation, 61 F Supp 2d A^A 15 982, 987 n1 (D Ariz 1999). Accordingly, the court GRANTS 16 defendants’ request for judicial notice of exhibits HH-KK in order Z 17 to consider the complete record of the defendants’ alleged

w 18 fraudulent statements and omissions in light of the other 19 information available to the market. 20 21 II 22 In deciding a motion to dismiss, the court must accept 23 all well-pleaded factual allegations in the complaint as true. 24 Blake v Dierdorff, 856 F2d 1365, 1368 (9th Cir 1988). Accordingly, 25 the following allegations appear in the SAC. Doc #76.

26 Plaintiffs are a class consisting of all purchasers of 27 the publicly traded securities of defendant Nuvelo between January 28 5, 2006 and December 8, 2006, inclusive (the “Class Period”). Doc

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1 #76 at 4. Defendants are a biopharmaceutical company Nuvelo and 2 several of Nuvelo’s senior officers and managers: Ted Love, Gary 3 Titus and Michael Levy. Id at 20-21. The SAC alleges that Nuvelo 4 stock traded at artificially high prices during the Class Period 5 because of fraud by defendants. Id at 4, 82-83. 6 Prior to and during the Class Period, Nuvelo was engaged 7 in preclinical and clinical testing of medical drugs. Id at 4. 8 Nuvelo’s “lead product” was a drug called alfimeprase that Nuvelo

9 was testing for its safety and ability to dissolve blood clots. 10 Id. Nuvelo was in the process of testing alfimeprase in order to 11 gain regulatory approval of the drug and to bring it to market. ;9^ U ^ j 12 Id. ^^ ° 13 To gain regulatory approval, the FDA requires that the

A .4 14 sponsor of a drug demonstrate that it is safe and effective in

15 three human clinical trials (“phase 1", “phase 2" and “phase 3"). 0 z 16 Id at 28. The FDA does not approve a drug in general, but rather ., p_!5 17 approves a drug for a specific use, or “indication.” Id. ^. w° 18 In 2003, Nuvelo began conducting clinical trials of 19 alfimeprase for two indications: dissolving blood clots in the 20 legs (PAO) and dissolving blood clots in occluded catheters for 21 patients undergoing treatment (CO). Id at 24. The FDA approves 22 particular claims of efficacy based on the results of the trials. 23 Id at 28. So Nuvelo designed its alfimeprase trials to demonstrate 24 particular claims about the drug for the treatment of both PAO and 25 CO. 26 A

27 Nuvelo called its clinical program for CO SONOMA (Speedy 28 Opening of Non-functional Occluded catheters with Mini-dose

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1 Alfimeprase). Doc #76 at 36. SONOMA’s primary endpoint, or the 2 claim Nuvelo was attempting to get approval for, was alfimeprase’s 3 ability to clear occluded catheters fifteen minutes after 4 administration of the drug. Id at 28-29. If Nuvelo could prove 5 that alfimeprase increased blood flow rates of occluded catheters 6 in fifteen minutes, it would gain an advantage over a competing 7 drug —— Genentech’s Cathflo Activase, which had been proven in 8 clinical trials to increase blood flow rates of catheters in thirty 9 minutes. Id at 29. 10 Nuvelo completed the phase 2 trials for CO (SONOMA-1) in 11 2004. Id at 37. In a December 2004 press release, Nuvelo reported ;9^ 12 that one dose of alfimeprase produced cumulative blood flow rates c U 13 of fifty percent in occluded catheters at fifteen minutes compared

9Z.4 14 to zero percent for Cathflo after fifteen minutes. Id at 37. 15 In May 2005, Nuvelo announced its phase 3 clinical trial

0 16 program for CO. Id at 38. The program consisted of two phase 3 ., p_!5 17 trials: SONOMA-2 and SONOMA-3. Id. SONOMA-2 was a randomized, ^. w° 18 double-blind, 300 patient study testing the efficacy of alfimeprase 19 in restoring blood flow to occluded catheters after fifteen 20 minutes. Id. Two-thirds of the patients received alfimeprase and 21 the remainder received a placebo, or a substance having no effect. 22 Id. SONOMA-3 was an 800 patient trial evaluating the safety of 23 alfimeprase. Id. 24 The success of SONOMA-2 rested on the statistical 25 difference in the restoration of function between the alfimeprase 26 group and the placebo group after fifteen minutes. Id. To gain 27 approval, the FDA requires a statistically significant difference. 28 Doc #76 at 29. “Statistically significant” means that a given

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1 result is unlikely to have occurred by random chance or due to 2 factors outside the control of the study. Id. Statistical 3 significance is expressed as a “p-value,” which represents a 4 probability that a particular hypothesis tested by a trial happened 5 by chance. Id. Statistical significance consisting of a p-value 6 of less than 0.05 has “traditionally been considered convincing 7 evidence by the FDA.” Id at 29. 8 The SAC alleges that defendants misled investors by

9 failing to divulge that Nuvelo had an agreement with the FDA that

10 regulatory approval rested on SONOMA-2 achieving a much higher 11 threshold for statistical significance: a p-value of 0.00125. Id t 40. 12 at 38-39. The May 26, 2005 press release announcing the design of C U 13 the phase 3 CO program stated that the program was “modeled after .0 .4 14 the Cathflo® Activase® program in this indication.” Id at 54. ^A 15 According to the SAC, this statement and others like it were 16 misleading because the Cathflo Activase trial used the customary p- 0Z 17 value of 0.05 as the threshold for statistical significance and

W-1 18 investors reasonably expected SONOMA-2 to use the same standard. 19 Id. Defendants’ failure to disclose SONOMA-2's more stringent 20 statistical standard misled investors about the likelihood that

21 SONOMA-2 would succeed. 22 23 B 24 Nuvelo called its clinical trial program for PAO “NAPA”

25 (Novel Arterial Perfusion with Alfimeprase). Doc #76 at 31. PAO, 26 also known as “leg attack,” involves restricted blood flow in the 27 legs and can be treated by balloon angioplasty, open surgery, 28 catheter based intervention and off-label use of thrombolytic

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1 agents. Doc #76 at 31. NAPA’s primary endpoint was the number of 2 PAO patients treated with alfimeprase who avoid open surgery after 3 30 days. Id at 28. If Nuvelo could prove that patients treated 4 with alfimeprase had a high likelihood of avoiding surgery, 5 alfimeprase could be marketed as a less-invasive and more cost- 6 effective alternative to surgery. Id at 32. 7 Nuvelo’s phase 2 PAO trial (NAPA-1) was a “safety trial,”

8 attempting to demonstrate that administering alfimeprase to PAO 9 patients was safe. Id at 32. NAPA-1, however, also measured a 10 number of other endpoints, including avoidance of open surgery 11 after 30 days —— the endpoint Nuvelo would later attempt to use in 12 phase 3 to gain approval for a claim of efficacy. Doc #76 at 32. C U 13 In the trial, patients received alfimeprase via a side hole

9Z.4 14 catheter inserted through the blood clot. Id. In a January 31, 15 2006 Prospectus Supplement, relating to a Nuvelo stock offering,

16 defendants touted the results of NAPA-1, stating: “Up to 69% of ., z p -!5 17 study patients were able to avoid open vascular surgical ^. w 18 intervention in the 30 days following treatment with alfimeprase.” 19 Id at 63. 20 The SAC alleges that “[a]ccording to a knowledgeable 21 vascular surgeon, it is known among vascular surgeons who use side 22 hole catheters to deliver the Genentech thrombolytic drug as a 23 treatment for PAO, such catheters often break up blood clots that 24 are not too large which restores some native blood flow.” Id at 25 32. This order refers to the breaking up of blood clots solely due 26 to the insertion of the catheter through the clot, and not due to 27 any drug administered through the catheter, as the “catheter 28 effect.” Because there was no placebo group, “the proportion of

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1 patients in NAPA-1 who avoided open surgery due to alfimeprase 2 could not be determined accurately due to the [catheter effect].” 3 Doc #76 at 33. 4 The SAC suggests that defendants were aware that a 5 significant catheter effect, and not alfimeprase, may have been 6 responsible for many of the NAPA-1 patients avoiding surgery. 7 Defendants allegedly discussed the catheter effect at company-wide 8 meetings in 2004 or 2005. Id. Moreover, the catheter effect is

9 “perceptible on an angiogram,” and defendant Love, a senior officer 10 at Nuvelo, “saw angiograms from NAPA-1.” Id at 32. 11 Nuvelo’s phase 3 PAO trial program, NAPA-2, was designed :9^ 12 C U to test the efficacy of alfimeprase at causing patients to avoid ° 13 surgery after 30 days. Id at 33. In order to be sure that the

A .4 14 catheter effect was not responsible for patients who avoided

15 surgery, NAPA-2 included both a 300 patient alfimeprase trial and a 0 16 300 patient placebo trial. Id at 33-35. According to a February ., p17 27, 2006 Nuvelo press release, “[t]he [phase 3 NAPA] program w 18 consist[ed] of two overlapping randomized, double-blind, multi- 19 national trials comparing * * * alfimeprase with placebo in total 20 of 600 patients.” Id at 65. 21 Plaintiffs allege that an undisclosed element of the 22 design of NAPA-2 indicates that defendants believed there was a 23 significant risk that the catheter effect had biased NAPA-1's 24 avoidance of surgery endpoint. Doc #76 at 33-35. In the design of 25 NAPA-2, defendants took the “extraordinary measure” of splitting 26 the 300 patient placebo group into two groups —— a 38 patient Peri- 27 Thrombus (“PT”) group and a 262 Intra-Thrombus (“IT”) group. Doc 28 #76 at 33. The IT group received the placebo via a side hole

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1 catheter inserted through the blood clot, just as alfimeprase was 2 administered to the alfimeprase group. Id. But the PT group 3 received the placebo via a different kind of catheter inserted 4 near, but not through, the blood clot. Id at 33-34. Because the 5 placebo was administered to the 38 PT group patients in a way 6 different from alfimeprase-treated patients, the PT group could not

7 be used in the comparison with the alfimeprase trial. Id. “[T]he 8 only purpose of [the PT] group was to compare its results with the 9 [IT] placebo group, to measure the [catheter effect].” Id at 34 10 (emphasis in original). According to the SAC, the fact that 11 defendants included the PT group in NAPA-2, without informing the ;9^ 12 public, reveals that defendants believed there was a much more c U 13 serious risk that NAPA-2 would fail due to the catheter effect.

qA 14

15 C "00 16 According to the SAC, defendants’ omissions about the ., p -!5 17 risks of a more stringent target p-value for SONOMA-2, and the ^. 0 W-4 18 catheter effect bias in the results of NAPA-1, rendered multiple 19 statements misleading. All of these statements allegedly misled 20 investors about the likelihood that alfimeprase would succeed in 21 its phase 3 trials, gain regulatory approval and ultimately attain 22 commercial success. 23 On May 26, 2005, Nuvelo issued a press release announcing 24 its phase 3 alfimeprase program for CO. Doc #76 at 53. The press 25 release stated: “The Phase 3 program for alfimeprase in CO is 26 modeled after the Cathflo® Activase® program in this indication.” 27 Doc #76 at 54. The Cathflo Activase program —— unlike SONOMA-2 —— 28 used the customary 0.05 p-value standard for statistical

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1 significance. Id. According to the SAC, drawing comparisons to 2 the Cathflo Activase program without noting the more stringent p- 3 value requirement misled investors about the riskiness of SONOMA-2 4 in comparison to the Cathflo Activase program. Id at 54-55. 5 In a November 1, 2005 conference call with securities 6 analysts and investors, defendant Levy discussed Nuvelo’s

7 assumptions about the catheter effect during the PAO phase 2 trial 8 NAPA-1. Id at 55-57. Levy stated, “our drug is being compared to

9 placebo in Phase 3 pivotal trials, and we expect to see the 10 preponderance of patients avoiding surgery with alfimeprase, and we 11 expect to see next to no patients being able to avoid surgery with ;9^ 12 placebo.” Id at 56. Levy also responded to a question about the C U 13 number of patients likely to avoid surgery in the placebo trial,

A .4 14 stating: “we’re assuming a relatively low placebo rate. You know

15 if you wanted to guesstimate something in order of 10% or so, you

0 16 would be approximately right.” Id at 56. The SAC suggests, ., p17 however, that defendants believed there was a significant risk that ^. w 18 the placebo rate was higher than ten percent because the catheter 19 effect would cause many patients to avoid surgery even if they were 20 only administered a placebo. 21 While Levy disclosed Nuvelo’s allegedly fraudulent belief 22 that the catheter effect was low, defendants continued to omit 23 information about the 38 patient PT placebo group. Id at 56-57. 24 In addition to hiding defendants’ concern about the catheter 25 effect, the omission about the 38 patient PT placebo group also 26 allegedly misled investors about the likelihood that the phase 3 27 PAO program would succeed because the 38 PT placebo group could not 28 be compared to the alfimeprase phase 3 trial given the different

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1 catheter delivery mechanism. Doc #76 at 57-59. That is to say, 2 because the PT patients received a placebo via a different catheter 3 from the alfimeprase patients, any comparison between those two 4 groups was meaningless. Id. Accordingly, the undisclosed PT group 5 meant that the actual quantity of patients in the placebo group, 6 for purposes of comparison, was only 262. Id. 7 The SAC alleges other fraudulent statements in 2006 —— on

8 January 6, January 31, February 27, March 15, April 10, April 24, 9 May 5, July 7 and August 3 —— but they all essentially repeat the 10 same fraudulent statements alleged in 2005. Id at 59-73. Each of 11 these statements allegedly misrepresented the risks associated with 12 U U the phase 3 alfimeprase trials due to the accompanying omissions 13 concerning the FDA-agreed p-value for SONOMA-2 and the likely .4 tj .4 14 catheter effect biasing the results of NAPA-1.

0 z 16 D

p_!5 17 According to the SAC, just prior to the start of trading ^. w 18 on December 11, 2006, Nuvelo revealed that alfimeprase failed to 19 meet its primary endpoints in the phase 3 clinical trials for both 20 PAO and CO. Doc #76 at 50. Alfimeprase failed to meet the primary 21 endpoint for the CO treatment, which was to restore blood flow in 22 catheters after 15 minutes demonstrated to a p-value of 0.00125. 23 Id at 51. Alfimeprase also failed to prevent surgery for 30 days 24 in PAO patients, which was the primary endpoint for the PAO 25 indication. Id at 50-51. A December 11 press release announced 26 that enrollment in future trials —— NAPA-3 and SONOMA-3 —— had been 27 suspended. Doc #76 at 51. 28 //

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1 According to the SAC, during a December 11, 2006 2 conference call, defendants disclosed that alfimeprase failed NAPA- 3 2 and SONOMA-2 due to factors that had been previously undisclosed 4 or downplayed as risks. Doc #76 at 40-41. Defendants explained 5 that for PAO, although alfimeprase dissolved some clots, it did not 6 perform significantly better than the placebo group because, as it

7 turns out, the catheter effect dissolved “a substantial number of 8 clots” in both groups. Id at 40. Defendants Love and Levy 9 “admitted that since none of the Company’s prior clinical testing 10 had included the use of a placebo, any past instances of 11 alfimeprase ‘dissolving blood clots’ was more likely than not 12 U U simply attributable to the [catheter effect].” Id. For CO,

* ^ 13 defendant Love revealed that Nuvelo “‘had an agreement with the FDA 14 A^A .4 that the p-value would be far lower than 0.05.’” Id at 41. Love 15 also stated, “‘While the data from the SONOMA-2 trial show a

0 16 statistically significant difference in the rate at which ., p -!5 17 alfimeprase and placebo dissolve clots in venous catheters at 15 ^. w 18 minutes, this result did not meet the high threshold established by 19 the FDA for regulatory approval based on only one control trial.’” 20 Id at 41. 21 22 E

23 The SAC alleges that defendants’ fraudulent statements 24 and omissions described above caused plaintiffs’ losses by 25 inflating the price of Nuvelo stock during the Class Period. Doc 26 #76 at 82-90. While the SAC does not allege that the price 27 increased following each —— or any —— of the alleged fraudulent 28 statements, the SAC points to two dramatic changes in price of the

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1 stock and attributes them to the alleged fraud. Doc #76 at 83. 2 The first dramatic change in the stock price occurred on 3 January 5, 2006 —— not coincidentally, the start of the class 4 period. Id at 45. On January 5, Nuvelo announced it had entered 5 into a “financial alliance” with the pharmaceutical giant Bayer. 6 Id. “The Bayer deal provided a $50 million upfront payment to 7 Nuvelo and included up to $385 million in additional fees and

8 payments.” Id. Nuvelo’s stock price increased from a previous 9 close of $9.01 to close at $12.67 on January 5 —— an increase of 10 41%. Id. 11 While defendants’ alleged fraudulent statements and 12 omissions had been alive in the market for months by the time the U U 13 Bayer deal was announced, plaintiffs allege that those statements * ^ .4 14 and omissions were still substantially responsible for the dramatic .4 15 rise in Nuvelo’s stock price. Id at 86. According to the SAC,

0 16 “[t]he synergistic effect of Defendants’ false and misleading

p_!5 17 statements combined with Defendants’ new-found actual ability to ^. 0 W-1 18 fund the testing caused Nuvelo’s stock price to skyrocket.” Id. 19 This synergy allegedly occurred in two ways. First, “the market 20 recognized” Bayer’s involvement with Nuvelo and alfimeprase as an 21 “endorsement” of the prior false and misleading statements. Doc 22 #76 at 86. Second, before the Bayer deal, Nuvelo may not have been 23 able to afford the phase 3 alfimeprase trials; Bayer gave Nuvelo 24 the necessary financial backing to move forward. Id. Accordingly, 25 the SAC alleges that the significant increase in the price of 26 Nuvelo stock that occurred on January 5 was caused in part by 27 defendants’ fraudulent statements and omissions about alfimeprase. 28 Doc #76 at 86.

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1 The second dramatic change in the stock price occurred on 2 December 11, 2006 —— the last day of the Class Period —— when 3 defendants disclosed that alfimeprase failed the phase 3 trials. 4 Id at 87. Nuvelo’s stock price plummeted from a previous day’s 5 close of $19.55 to close at $4.05. Id at 51. As the SAC 6 describes the December 11 disclosures, “defendants admitted that 7 alfimeprase had not worked as represented in the Phase 2 trials, 8 that the Phase 3 trials had failed as a result of risks that had 9 been concealed or downplayed by defendants in a manner that misled 10 investors during the Class Period.” Id at 87 (emphasis in 11 original). By linking defendants’ fraudulent statements and U U 12 omissions to the January 5 rise in the stock price and the December ° 13 11 fall in the stock price, plaintiffs allege that their “damages

A^A 14 were substantially caused by the scheme to defraud.” Id at 88. 15 0 z 16 17 III ^. w 18 Section 10(b) of the Securities Exchange Act of 1934 and 19 SEC Rule 10b-5 make it unlawful for any person, in connection with 20 the purchase or sale of any security: (1) to engage in fraud, (2) 21 to make an untrue statement regarding a material fact or (3) to 22 make a misleading statement by omitting a material fact. 15 USC § 23 78j(b); 17 CFR § 240.10b-5. The elements of a Rule 10b-5 claim 24 are: (1) material misrepresentation or omission of fact; (2) 25 scienter; (3) connection with the purchase or sale of a security;

26 (4) reliance; (5) economic loss and (6) loss causation. Dura

27 Pharmaceuticals, Inc v Broudo, 544 US 336, 341–42 (2005). Claims 28 brought under section 10(b) and Rule 10b-5 must first meet the

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1 particularity requirements of FRCP 9(b). In re Stac Electronics 2 Securities Litigation, 89 F3d 1399, 1404 (9th Cir 1996). FRCP 9(b) 3 requires a plaintiff alleging fraud to “set forth what is false or 4 misleading about [the] statement, and why it is false.” In re 5 GlenFed Securities Litigation, 42 F3d 1541, 1548 (9th Cir 1994) 6 (superseded by the Private Securities Litigation Reform Act 7 (“PSLRA”) on other grounds). 8 Additionally, a complaint must satisfy the more stringent

9 requirements imposed on securities fraud pleadings by the PSLRA. 10 The PSLRA requires that a complaint: (1) “specify each statement 11 alleged to have been misleading [and] the reason or reasons why the 12 statement is misleading” (15 USC § 78u-4(b)(1)); (2) for any such U U 13 allegations based on information and belief, “state with .0 .4 .4 14 particularity all facts on which that belief is formed” (15 USC § 15 78u-4(b)(1)) and (3) “with respect to each act or omission * * *

0 z 16 state with particularity facts giving rise to a strong inference ., p -!5 17 that the defendant acted with the required state of mind” (15 USC § ^. W-1 18 78u-4(b)(2)). To meet the required state of mind element —— 19 scienter —— the complaint must allege “that the defendants made the 20 false or misleading statements either intentionally or with 21 deliberate recklessness.” In re Daou Systems Inc, 411 F3d 1006, 22 1015 (9th Cir 2005), citing In re Silicon Graphics Securities 23 Litigation, 183 F3d 970, 974 (9th Cir 1999). 24 As noted above, the Prior Order dismissed the Prior 25 Complaint on December 4, 2008. Doc #69. The court based dismissal 26 on three grounds: (1) Nuvelo failed adequately to plead loss 27 causation because there were no allegations to support the fact 28 that the changes in the price of Nuvelo stock resulted from

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1 defendants’ fraudulent statements or omissions (Id at 6-17); (2) 2 the alleged fraudulent statements and omissions were not misleading 3 (Doc #69 at 17-32); (3) some of the alleged fraudulent statements 4 and omissions were protected by the PLSRA safe harbor for forward 5 looking statements (Id at 32-34). Defendants argue that none of 6 these maladies has been cured in the SAC and also that the SAC 7 fails to allege scienter. This order addresses these four issues 8 in turn. 9 10 A 11 The loss causation element of a securities fraud action t 4o 12 requires “a causal connection between the material 0U 13 misrepresentation and the loss.” Dura Pharmaceuticals v Broudo, * ^

A .4 14 544 US 336, 342 (2005). “[A]s long as the complaint alleges facts ^A 15 that, if taken as true, plausibly establish loss causation, a Rule

o z 16 12(b)(6) dismissal is inappropriate. This is not ‘a probability

p -!5 17 requirement * * * it simply calls for enough fact to raise a ^. 0 W-4 18 reasonable expectation that discovery will reveal evidence of’ loss 19 causation.” In re Gilead Scis Sec Litig, 536 F3d 1049, 1057 (9th 20 Cir 2008), quoting Bell Atlantic Corp v Twombly, 550 US 544, 556 21 (2007) . 22 In the Prior Order, the court dismissed the Prior 23 Complaint, in part, because plaintiffs failed to link the alleged 24 fraudulent statements and omissions to changes in the price of 25 Nuvelo stock. While plaintiffs devoted many pages of the Prior 26 Complaint to a discussion of events prior to the start of the Class 27 Period, the only alleged material fraudulent statements and 28 omissions occurred during the Class Period. Doc #69 at 10. The

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1 court analyzed Nuvelo’s stock price before and after each of the 2 alleged fraudulent statements and omissions and found that the 3 stock price did not appear to respond in a material way to any of 4 the alleged misstatements or omissions. Id at 11. Additionally, 5 the alleged fraudulent statements consisted mostly of information 6 that was already known to the market before the Class Period began. 7 Id at 13. The court found that “[b]ecause the complaint does not

8 allege the relationship between the defendants’ alleged 9 misstatements about phase 2 studies and the plaintiffs’ loss” it 10 failed to plead loss causation. Doc #69 at 14. 11 Defendants argue that the loss causation deficiencies :9^ 12 pointed out in the Prior Order persist in the SAC. Defendants cite c U 13 language from the Prior Order stating “[t]he period of the alleged

9Z.4 14 price distortion and the class period in an open market securities 15 fraud action must coincide,” Doc #78, quoting Doc #69 at 10, in

o z 16 arguing that the court should dismiss the SAC. It appears, ., p -!5 17 however, that the court’s prior statement was incomplete. While ^. 0 W-4 18 loss causation is easier to allege if the stock price reacts 19 immediately to the alleged fraudulent statements or omissions in a 20 fraud on the market claim, there appear to be cases in which the 21 reaction of the stock price may not coincide, and thus the Class 22 Period may not coincide with the false or misleading statement.

23 For example, in In re Gilead Scis Sec Litig, 536 F3d 1049 (9th Cir 24 2008), the Ninth Circuit found that loss causation remained 25 plausible despite a “limited temporal gap” between a disclosure 26 correcting an alleged fraudulent statement and the ensuing decrease

27 in stock value. 536 F3d at 1058. In re Gilead found that the 28 corrective disclosure might plausibly have only affected the stock

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1 price after subsequent events (negative economic data) made the 2 corrective disclosure’s significance more apparent to the public. 3 536 F3d at 1058. This lag effect, according to the Ninth Circuit, 4 did not per se render loss causation implausible. Id. 5 The SAC contains sufficient new allegations that, if 6 taken as true, demonstrate loss causation. Plaintiffs now allege 7 that the fraud on the market began on May 26, 2005 —— several 8 months prior to the start of the Class Period —— and that the stock 9 price did not respond until January 5, 2006, the date of the Bayer 10 deal. Doc #76 at 53. The SAC alleges that the stock price 11 increased on January 5 due to “[t]he synergistic effect of 12 Defendants’ false and misleading statements combined with U^4-4 U .^ 13 Defendants’ new-found actual ability to fund the testing caused A 14 Nuvelo’s stock price to skyrocket.” Id. This new allegation of a ^A 15 synergy between the Bayer deal and the previous fraudulent

0 z 16 statements and omissions arguably renders the SAC’s loss causation ., p17 allegations plausible —— at least for pleading purposes. Id. If, ^. w 18 prior to the Bayer deal, Nuvelo did not have the financial ability 19 to fund phase 3 trials for alfimeprase, then investors might have 20 ignored Nuvelo’s statements concerning the phase 2 trials. The 21 financial support provided by the Bayer deal on January 5 may have 22 therefore added new significance to defendants prior fraudulent 23 statements and omissions. 24 Additionally, defendants argue that the SAC fails to link 25 sufficiently the drop in the stock price on December 11, 2006 to 26 the alleged fraud. Doc #78 at 30-31. The Ninth Circuit has held 27 that “[a]s long as the misrepresentation is one substantial cause 28 of the investment's decline in value, other contributing forces

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1 will not bar recovery under the loss causation requirement but will 2 play a role in determining recoverable damages." In re Daou 3 Systems Inc, 411 F3d 1006, 1025 (9th Cir 2005). Defendants argue 4 that December 11, 2006 was not only the date that defendants 5 corrected previous alleged fraudulent statements and omissions, but 6 it was also the date the market learned that alfimeprase failed 7 phase 3 trials. Doc #78 at 30. According to defendants, the SAC 8 fails to allege that the correction of the fraud, rather than the

9 failure of the trials, substantially caused plaintiffs’ losses by 10 causing the stock price to plummet. Doc #78 at 30-31. 11 The SAC alleges that “[h]ad defendants corrected their :9^ 12 false statements and made meaningful disclosure of the risks prior O U 13 to or during the Class Period, Nuvelo’s securities would not have * ^

9Z.44 ^ 14 traded as high as they did during the Class Period, or would have 15 declined sooner than they did following the end of the Class

0 16 Period.” Doc #76 at 83. The SAC alleges that defendants concealed ., p -!5 17 their knowledge —— not that the phase 3 trials would certainly fail ^. 0 W-4 18 —— but that they included significant undisclosed risks. The 19 disclosures on December 11 that the trials failed, therefore, 20 revealed to the market not only the concealed risks of the trials 21 but also that those risks had led to the failure of the trials. 22 The drop in the stock price can be attributed in part to both 23 disclosures. And, as defendants argue, it is not clear on the face 24 of the SAC the exact amount to apportion to each of these 25 disclosures. 26 But, at this stage, plaintiff’s allegations are 27 sufficient. The SAC alleges that “a substantial part of the 28 inflation” of the stock price eliminated on December 11 was the

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1 result of the corrected fraud. Doc #76 at 87. This together with 2 the allegations about the synergistic Bayer deal plausibly suggest 3 that a substantial portion of plaintiffs’ losses on Nuvelo stock 4 were the result of the alleged fraudulent statements and omissions. 5 6 B 7 The Prior Complaint contained similar allegations to

8 those of the SAC about the defendants’ fraudulent statements and 9 omissions. See Doc #31. Both complaints alleged that defendants 10 omitted or downplayed risks that NAPA-2 was likely to fail because 11 the catheter effect inflated previous results in NAPA-1 about :9^ 12 c U restored blood flow in patients. Compare Doc #76 at 44, with Doc ^^0 13 #31 at 27. Both complaints also alleged that defendants omitted or

9Z.44 ^ 14 downplayed risks that SONOMA-2 was likely to fail due to the 15 agreement between Nuvelo and the FDA that to gain approval

0 z 16 alfimeprase would have to achieve a more stringent p-value than the ., p -!5 17 traditional measure. Compare Doc #76 at 42, with Doc #31 at 22. ^. w 18 Finally, both complaints allege that defendants omitted to disclose 19 a secret target p-value that they required SONOMA-2 to achieve in 20 order to ensure that alfimeprase would be commercially viable. 21 Compare Doc #76 at 18, with Doc #31 at 24-25. The SAC alleges 22 facts to bolster the allegations about the undisclosed risks of the 23 catheter effect and the more stringent p-value, but the allegations 24 about the undisclosed target product profile remain inadequate to 25 constitute a plausible securities fraud allegation. 26 1

27 The Prior Order found that the Prior Complaint failed to 28 allege that omissions about the catheter effect on the results of

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1 the PAO trials were misleading. Doc #69 at 22-24. The Prior Order 2 found that defendants’ disclosure that they assumed ten percent of 3 patients who received a placebo would avoid surgery was not 4 misleading because the market was aware of uncertainty related to 5 assumptions and there were no allegations that defendants knew the 6 catheter effect would cause any more than ten percent of placebo

7 patients to avoid surgery. Id. 8 The SAC contains two new allegations relevant to the

9 alleged fraudulent statements and omissions about the catheter 10 effect. The SAC alleges that defendant Love had access to 11 information during the phase 2 PAO trial, NAPA-1, indicating :9^ 12 whether patient blood clots were broken up by a catheter effect. C U 13 Doc #76 at 32. Specifically, the SAC alleges that Love “told .0 A .4 14 analysts he saw angiograms from NAPA-1" and that “[t]he appearance

15 on an angiogram of a clot broken up by a catheter is different than

0 16 that of a clot dissolved by a [] drug.” Id. Additionally, the SAC ., p17 alleges that defendants took an “extraordinary measure” and ^. w° 18 designed NAPA-2 to contain a secret group of thirty-eight patients 19 who were administered alfimeprase via a PT catheter that was solely 20 included in the phase 3 program to test the catheter effect. Id at 21 33-34. 22 Defendants argue that these new allegations are 23 insufficient because the SAC still does not allege that defendants 24 omitted to disclose a known risk that the catheter effect was 25 likely to cause the PAO phase 3 trial to fail. Doc #78 at 18-19. 26 Defendants argue that “[t]here is no basis to conclude that 27 Defendants included the [PT] group because they were concerned that 28 the catheter, as opposed to alfimeprase, was disrupting the clot in

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1 a material number of patients.” Doc #78 at 19. Defendants then 2 list a number of other reasons defendants may have included the PT 3 group. Id. 4 While it is true that there may be explanations for the 5 PT group other than defendants’ knowledge of a significant and 6 undisclosed catheter effect, at this stage, plaintiffs’ allegations 7 need only be plausible. The allegation about defendant Love’s

8 access to information about the catheter effect during NAPA-1, 9 together with the alleged “extraordinary measure” of including a 10 secret PT group in the placebo group of NAPA-2, carries the SAC’s 11 allegations beyond the threshold of plausibility. Cd 12 2 U U 13 Regarding the undisclosed stringent p-value for SONOMA-2, * ^

9Z.4 14 the Prior Order found that the alleged fraudulent statements and 15 omissions in the Prior Complaint were not misleading. The court

0 z 16 found that the Prior Complaint failed to account for the difference .,

p_!5 17 between a phase 3 program that seeks FDA approval based on one ^. W-1 18 placebo-controlled study and a program that seeks approval based on 19 two placebo-controlled studies. Id at 26. Defendants’ failure to 20 disclose that they had a target p-value for SONOMA-2 of 0.00125 was 21 not misleading, according to the Prior Order, because a reasonable 22 investor would have been aware of FDA guidance on the subject, 23 which requires a more stringent p-value when a drug company seeks 24 approval based on a single trial. Doc #69 at 26. 25 The SAC does not ignore the relationship between the 26 number of placebo-controlled trials and the p-value, as did the 27 Prior Complaint. Instead, the SAC alleges that defendants misled 28 investors by failing to disclose that Nuvelo sought regulatory

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1 approval based on one trial at a stringent p-value rather than two 2 trials at a more lenient p-value. The SAC alleges that defendants 3 statements that SONOMA-2 was modeled after the Genentech Activase 4 trial and that the phase 3 program for CO consisted of two pivotal 5 trials were materially false and misleading because defendants 6 failed to disclose that the p-value for SONOMA-2 was below the 7 “traditional” standard used in the Genentech Activase trial of 8 0.05. Doc #76 at 53, 54, 66, 68. 9 Defendants respond that the market was aware that the p- 10 value for SONOMA-2 was below 0.05. Doc #78 at 22-23. Defendants 11 disclosed that their phase 3 program for CO consisted of one ;9^ 12 placebo-controlled trial (SONOMA-2) and one open-label single arm O U ° 13 study (SONOMA-3). Doc #76 at 53-54. According to defendants, the

9Z.4 14 market must have realized that because “Nuvelo was not conducting a 15 second placebo-controlled study,” that SONOMA-2 would have to

0 z 16 follow FDA Guidance to substantiate a single study and achieve “‘a 4)

p_!5 17 very low p-value.’” Doc #78 at 23, quoting Doc #80-41, Exh II at ^. W-1 18 19. 19 Defendants’ argument about market knowledge relies on 20 publications by the FDA demonstrating that a single trial “very low 21 p-value” phase 3 program would be appropriate for the CO indication 22 of alfimeprase. FDA guidance, however, is not clear on the 23 subject. The FDA publication Guidance for Industry: Providing 24 Clinical Evidence of Effectiveness for Human Drug and Biological 25 Products (1998) (“FDA Guidance”), Doc #80-41, Exh II, states that 26 FDA approval based on a single study is limited. The FDA Guidance 27 states that the FDA has relied on a single study “generally only in 28 cases in which a single multicenter study of excellent design

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1 provided highly reliable and statistically strong evidence of an 2 important clinical benefit, such as an effect on survival, and a 3 confirmatory study would have been difficult to conduct on ethical 4 grounds.” Id at 7. The FDA Guidance also states that “reliance on 5 only a single study will generally be limited to situations in 6 which a trial has demonstrated a clinically meaningful effect on 7 mortality, irreversible morbidity, or prevention of a disease with 8 potentially serious outcome and confirmation of the result in a 9 second trial would be practically or ethically impossible. Id at 10 17. Because SONOMA-2 tested the ability of alfimeprase to restore

40 11 blood flow in occluded catheters —— rather than to treat a serious 12 0U illness or life-threatening condition —— it is plausible that ° 13 investors did not believe that FDA would approve alfimeprase based

A .4 14 on a single, “very low p-value,” trial.

15 Defendants also argue that plaintiffs fail to allege with

0 z 16 particularity that “Defendants knew that the trial would not meet ., p_!5 17 the p-value and would cause phase [3] trials for CO and PAO to ^. w 18 fail.” Doc #78 at 24. As defendants point out, “‘the fact that a 19 prediction proves to be wrong in hindsight does not render the

20 statement untrue when made.’” Doc #78 at 24, quoting In re Syntex

21 Corp Securities Litigation, 95 F3d 922, 929 (9th Cir 1996). 22 But the SAC need not allege that defendants knew SONOMA-2 23 would fail; the SAC need merely allege that defendants misled

24 investors by omitting to disclose a material risk that SONOMA-2 25 would fail. If concealing the target p-value during the Class 26 Period had the effect of substantially inflating the price of 27 Nuvelo stock, then knowledge of the undisclosed risk is the subject 28 of the material fraudulent statement or omission —— not knowledge

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1 that the trial would surely fail. It is unclear whether plaintiffs 2 will be able to meet a higher evidentiary standard to show that the 3 undisclosed p-value had an effect on the stock price, but taking 4 plaintiffs’ allegations as true, the alleged fraudulent statements 5 and omissions about the agreement with the FDA on a 0.00125 p-value 6 survive defendants’ motion to dismiss. 7 3 8 The SAC also alleges that defendants omitted to disclose

9 a “secret product profile” that defendants believed was necessary 10 for alfimeprase to meet in order to be a “commercial success.” Doc 11 #76 at 18. The SAC alleged that this secret product profile was :9^ 12 more stringent than the standard for FDA approval and consequently, c U ^^ 13 and unbeknownst to investors, rendered commercialization of * ^

A .4 14 alfimeprase even less likely.

15 Prior Complaint alleged a similar omission to disclose a

o z 16 secret product profile and the court found it to be not misleading. ., p -!5 17 The Prior Order stated that “the risk that a product may receive ^. 0 W-1 18 federal approval but not the marketplace’s acceptance should be 19 obvious. Plaintiffs do not explain how defendants ‘affirmatively 20 create[d] an impression of a state of affairs that differ[ed] in a 21 material way from the one that actually exist[ed].” Doc #69 at 30,

22 quoting Brody v Transitional Hospitals Corp, 280 F3d 997, 1006 (9th 23 Cir 2002). The SAC does not cure this defect. Accordingly, the 24 SAC’s allegations about the omission to disclose the secret product 25 profile are DISMISSED for failure to state a claim. 26 27 C

28 Defendants also argue that the SAC, like the Prior

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1 Complaint, alleges fraud for “forward-looking statements,” which 2 are not actionable when accompanied by cautionary language under 3 the PLSRA safe harbor provision. Doc #78 at 29-30. The PLSRA 4 defines forward-looking statements as including “a projection of 5 revenues,” “plans and objectives of management” and “assumptions 6 underlying or relating to” the above. 15 USC § 78u-5(i)(1)(A)-(D). 7 A defendant “shall not be liable” with respect to any forward- 8 looking statement that is “identified as a forward-looking

9 statement, and is accompanied by meaningful cautionary statements 10 identifying important factors that could cause actual results to 11 differ materially from those in the forward-looking statement.” 15 12 USC § 78-u-5(c)(1). The Prior Order found that the Prior 0U 13 * ^ Complaint’s alleged fraudulent statements about alfimeprase’s “path 14 A^A.4 to regulatory approval” and potential for “transformative” 15 commercial success were shielded by the PLSRA safe harbor

o z 16 provision. Doc #69 at 32. .,

p_!5 17 The SAC does not allege that defendants’ optimistic ^. w° 18 statements about alfimeprase’s path to regulatory approval or 19 commercial success are the fraudulent statements giving rise to 20 liability. Rather, the SAC focuses on known present risks about 21 the interpretation of the phase 2 results and the design of phase 22 3. These statements were not allegedly misleading because they 23 failed to predict the future, but because they concealed or 24 downplayed known present risks related to regulatory approval. 25 Accordingly, the PLSRA does not shield defendants from liability 26 for the alleged fraudulent statements in the SAC. 27 // 28 //

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1 D 2 Defendants also argue that the SAC’s allegations fail to 3 create a strong inference of scienter. Doc #78 at 28. Defendants 4 state that the “far more compelling and cogent inference to be 5 drawn from the allegations in the SAC and the materials subject to 6 judicial notice is that Defendants were not engaged in fraud.” Id

7 at 28 (emphasis in original). Defendants rely on the facts that 8 “[d]rug development is an inherently risky venture” and that 9 “Plaintiffs do not claim that Defendants knew the trials would not 10 succeed.” Id. Defendants also emphasize that there are no 11 allegations that defendants sold their stock at the alleged 12 U U inflated prices during the Class Period and that Bayer invested in 13 Nuvelo after, one would think, extensive due diligence. Id at 28-

A .4 14 29. According to the stock records, only one of the individual

15 defendants sold any stock during the Class Period and one of the

0 z 16 individual defendants purchased stock during the Class Period. Doc ., p _!5 17 #80, Exh CC-FF. ^. w 18 As the Ninth Circuit has held, in securities cases 19 falsity and scienter “are generally strongly inferred from the same 20 set of facts and the two requirements may be combined into a

21 unitary inquiry under the PLSRA.” In re Vantive Corp Securities

22 Litigation, 283 F3d 1079, 1091 (9th Cir 2002) (internal citations 23 omitted). The discussion of the allegedly misleading nature of the 24 fraudulent statements and omissions described above demonstrates 25 that, when the allegations in the complaint are taken as true, the 26 SAC satisfies the scienter element. As described above, the SAC 27 does not allege that defendants knew the alfimeprase phase 3 trials 28 would fail; the SAC alleges that defendants concealed known risks

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1 of failure that, if disclosed, would have reduced the price of 2 Nuvelo’s stock to account for the greater risk of failure. As 3 another district court has held, “[t]here is nothing wrong with 4 taking a calculated risk. However, if, as Plaintiffs allege, 5 Defendants misled Plaintiffs about such risk by making assurances 6 * * * , Defendants may be held liable.” In re Amylin 7 Pharmaceuticals Securities Litigation, 2003 WL 21500525, at *5 (S D

8 Cal) . 9 10 IV 11 Based on the foregoing, the SAC satisfies the heightened :9^ 12 pleading standards of the PSLRA in all but one respect. The c U 13 alleged fraudulent omission about the secret product profile are

A .4 14 not misleading under the same reasoning articulated in the Prior

15 Order. The other alleged fraudulent statements and omissions,

Q z 16 however, when taken as true, survive defendants motion to dismiss.

p -!5 17 Accordingly, defendants’ motion to dismiss (Doc #78) is GRANTED IN ^. 0 W-4 18 PART and DENIED IN PART. 19 The parties shall meet and confer about a discovery and 20 pretrial preparation schedule and contact the courtroom deputy to 21 arrange a case management conference to be scheduled within sixty 22 days of the entry of this order. 23

24 IT IS SO ORDERED. 25 26 61400-,J*A--^

27 VAUGHN R WALKER United States District Chief Judge 28